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“You’re a financially sophisticated and well-to-do executive (business owner, etc.) and you shouldn’t be in the same investment vehicles as the average investor. You deserve better. We’ll give you access to exclusive investments with above average returns that only we can provide.”

We all know that Bernie Madoff used financial sophistication and exclusivity to attract wealthy and famous investors to his ill-fated Ponzi scheme, but I have become increasingly furious about the same sales approach being used by national brokerage firms, with horrible financial results.

Over the past year we have had people referred to us that were invested with well known companies like Merrill Lynch, Smith Barney and UBS Financial Services. These companies tout their size, financial sophistication and exclusive investment products as client benefits. Based on our review of portfolios they managed, their products have done nothing but separate clients from their wealth, while racking up profits for themselves.

One example is auction rate securities. According to SEC documents, these were sold by UBS, Citigroup, Morgan Stanley, Merrill Lynch and others as “cash equivalents” that could be liquidated in as little as 7 days, while paying higher interest rates than money market instruments and CDs. In February of 2008, the auction market used to reset the interest rates on these products failed, and clients learned how risky their investments actually were. A February 15, 2008 New York Times article said “some well-heeled investors got a big jolt from Goldman Sachs this week: Goldman, the most celebrated bank on Wall Street, refused to let them withdraw their money from investments they had considered as safe as cash.” Many people are still locked out of their investments, and the SEC has settled charges against several firms. One of our clients was finally able to recover 90% of his investment from his prior advisor, but only after several months of fighting and many sleepless nights.

Another example is structured investments. I couldn’t describe them any better than the May 28, 2009 Wall Street Journal article entitled Twice Shy on Structured Products?
“Wall Street burned thousands of investors with so-called structured products that were supposed to provide healthy profits and limit losses. Brokers, hoping investors’ memories are short, are pushing these high-fee products again with safety as the big selling point. Brokers are eager to sell these structured products because commissions are high, but they face explaining why many of these products didn’t perform as advertised. They also must convince clients that the firms behind these products are solid. Investors who bought products backed by firms that failed, such as Lehman Brothers, have big losses.”

The article goes on to tell the story of people who lost all their investment in these products. At The Asset Advisory Group, we have seen structured investments in portfolios we’ve been asked to review. In a UBS marketing piece, they describe a UBS structured investment product as an “integral part of a modern portfolio that provides enhanced return potential.” But the same investment described in the brochure was held in a portfolio we reviewed, and it had created significant losses.

Every investor should understand the investments they hold. If your advisor can’t explain it to you clearly, then his cloud of complexity is probably covering up layers of risk and fees. Why in the world would you want to own it?

Jeannette Jones, CPA, CFP ®